CORPORATE CULTURE AND THE ROLE OF BOARDS REPORT OF OBSERVATIONS
July 2016 #culturecoalition Coalition partners
Research partner
INDEPENDENT AUDIT
The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries, and oversee the regulatory activities of the accountancy and actuarial professional bodies.
The FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.
© The Financial Reporting Council Limited 2016 The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number 2486368. Registered Office: 8th Floor, 125 London Wall, London EC2Y 5AS CONTENTS
Culture report: Corporate Culture and the Role of Boards 1 FOREWORD
The way companies create and sustain value is directly linked to the debate about the role of business in society.
A healthy culture both protects and generates value. It is therefore important to have a continuous focus on culture, rather A healthy culture both than wait for a crisis. Poor behaviour can protects and generates be exacerbated when companies come value. It is therefore under pressure. A strong culture will endure important to have in times of stress and mitigate the impact. a continuous focus This is essential in dealing effectively with on culture, rather than risk and maintaining resilient performance. wait for a crisis. Strong governance underpins a healthy culture, and boards should demonstrate good practice in the boardroom and Sir Winfried Bischoff promote good governance throughout the Chairman business. The company as a whole must Financial Reporting Council demonstrate openness and accountability, and should engage constructively with shareholders and wider stakeholders There needs to be a concerted effort about culture. to improve trust in the motivations and integrity of business. Rules and sanctions In taking action on culture, I should like clearly have their place, but will not on their all those involved to consider three own deliver productive behaviours over important issues: the long-term. This report looks at the increasing importance which corporate Connect purpose and strategy to culture. culture plays in delivering long-term Establishing a company’s overall purpose business and economic success. is crucial in supporting the values and driving the correct behaviours. The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. Boards should oversee both.
2 Financial Reporting Council The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. Boards should oversee both.
Align values and incentives. Recruitment, I also ask investors and other stakeholders to performance management and reward engage constructively to build respect and should support and encourage behaviours trust, and work with companies to achieve Investors should consistent with the company’s purpose, long-term value. Investors should consider consider carefully values, strategy and business model. carefully how their behaviour can affect how their behaviour Financial and non-financial incentives company behaviour and understand how can affect company should be appropriately balanced and their motivations drive company incentives. behaviour and linked to behavioural objectives. In its research for this project the FRC has understand how their Assess and measure. Boards should give seen abundant evidence that companies motivations drive careful thought to how culture is assessed and boards are taking action to shape their company incentives. and reported on. A wide range of potential culture in order to encourage investment. indicators are available. Companies This will drive efficient capital allocation, can choose and monitor those that are improve productivity and deliver sustainable appropriate to the business and the value. We commend these companies and outcomes they seek. Objectively assessing encourage them to maintain this focus. We culture involves interpreting information encourage those companies yet to take sensitively to gain practical insight. action, to consider the benefits of addressing this important issue.
Sir Winfried Bischoff Chairman July 2016
Culture report: Corporate Culture and the Role of Boards 3 INTRODUCTION
The FRC’s mission is to promote high quality corporate governance and reporting to foster investment. The UK has a good reputation in this field which has underpinned a substantial amount of business success, but it is by no means perfect.
There are valid questions about how The view of the FRC is that the UK effectively existing corporate governance governance model remains an efficient arrangements address the board’s and effective means of meeting the responsibilities to stakeholders other objectives of, and arbitrating between, than shareholders, as envisaged in the the many stakeholders in the market. Companies Act 2006. The framework The combination of legislation, regulation of corporate governance in the UK is based and codes provides a flexible framework on a shareholder primacy and value model for companies and their stakeholders of equity capitalism. There is a continuing to pursue their objectives and achieve debate about what this means. One view long‑term success. Success depends, is that it necessarily involves a short-term however, on the spirit with which focus since shareholders are most companies and investors apply the interested in the certainty of more principles and use the flexibility they have. immediate financial returns. This inevitably has consequences in terms of the The FRC embarked on this project to gain decisions and actions which companies a better understanding of how boards are and investors take. Short-termism can drive currently addressing culture, to encourage poor business behaviours and conduct, discussion and debate, and to identify and for example: inappropriate incentives, share good practice to help companies. market-rigging, poor customer service, This report seeks to address how boards low levels of investment and opaque and executive management can steer financial structures and arrangements. corporate behaviour to create a culture that will deliver sustainable good performance. This report looks at the increasing importance which corporate culture plays in delivering long-term business and economic success – an issue very much to the fore this year. In doing so it focuses on the role of the board in shaping, monitoring and overseeing culture.
4 Financial Reporting Council The view of the FRC is that the UK governance model remains an efficient and effective means of meeting the objectives of, and arbitrating between, the many stakeholders in the market.
With the help of our partners in the project, The FRC is very grateful to all those who the Chartered Institute of Management responded to our invitation to participate, Meetings Accountants (CIMA), the City Values and would particularly like to thank our Forum, the Chartered Institute of Personnel partners for their contribution and guidance and Development (CIPD), the Institute of throughout the project. We would also like Business Ethics (IBE) and the Chartered to thank Independent Audit Limited for 300 Institute of Internal Auditors (IIA), we their invaluable work in surveying and focused on broad aspects of company interviewing chairmen, chief executives culture – the role of the board in delivering and company secretaries. Interviews sustainable success, engagement with employees, customers, shareholders and The report is designed to stimulate thinking other stakeholders, how to embed the around the role of boards in relation to desired culture, and how to assess culture. culture, and encourage boards to reflect 23 Our partners have published separate on what they are currently doing. Over the reports on each of these aspects, listed next year we will be monitoring reporting FTSE chief executives in Appendix 2. on culture by companies and investors. We welcome feedback on this report, This report was informed by an extensive which will inform our review of the literature review, the submissions from our Guidance on Board Effectiveness in 2017. 58 partners in the coalition, interviews with Please email: [email protected] to FTSE chairmen FTSE chairmen and chief executives, get in touch. surveys of heads of internal audit, chairmen and company secretaries, and many roundtables and discussions with investors, Surveys a range of professionals working in companies, and organisations with expertise and experience in company culture. 44 FTSE chairmen
Culture report: Corporate Culture and the Role of Boards 5 EXECUTIVE SUMMARY
Culture in a corporate context can be defined as a combination of the values, DEMONSTRATE attitudes and behaviours manifested by a company in its operations and relations LEADERSHIP with its stakeholders. These stakeholders Leaders, in particular the chief executive, include shareholders, employees, must embody the desired culture, embedding customers, suppliers and the wider this at all levels and in every aspect of the community and environment which are business. Boards have a responsibility to act where leaders do not deliver. affected by a company’s conduct.
Key observations
From our discussions with chairmen, chief executives, investors and a broad range of stakeholders and professional organisations we make the following observations about corporate culture:
RECOGNISE THE VALUE BE OPEN AND OF CULTURE ACCOUNTABLE A healthy corporate culture is a valuable Openness and accountability matter at every asset, a source of competitive advantage level. Good governance means a focus on and vital to the creation and protection of how this takes place throughout the company long-term value. It is the board’s role to and those who act on its behalf. It should determine the purpose of the company and be demonstrated in the way the company ensure that the company’s values, strategy conducts business and engages with and and business model are aligned to it. reports to stakeholders. This involves respecting Directors should not wait for a crisis before a wide range of stakeholder interests. they focus on company culture.
6 Financial Reporting Council EMBED AND INTEGRATE ASSESS, MEASURE The values of the company need to inform AND ENGAGE the behaviours which are expected of all Indicators and measures used should be employees and suppliers. Human resources, aligned to desired outcomes and material to internal audit, ethics, compliance, and risk the business. The board has a responsibility functions should be empowered and to understand behaviour throughout the resourced to embed values and assess company and to challenge where they find culture effectively. Their voice in the misalignment with values or need better boardroom should be strengthened. information. Boards should devote sufficient resource to evaluating culture and consider how they report on it.
ALIGN VALUES EXERCISE STEWARDSHIP AND INCENTIVES Effective stewardship should include engagement about culture and encourage The performance management better reporting. Investors should challenge and reward system should support themselves about the behaviours they are and encourage behaviours consistent encouraging in companies and to reflect with the company’s purpose, values, on their own culture. strategy and business model. The board is responsible for explaining this alignment clearly to shareholders, employees and other stakeholders.
Culture report: Corporate Culture and the Role of Boards 7 Executive summary
The Companies Act 2006 makes it clear Business, society and the that in pursuit of the overarching duty to corporate governance promote the success of the company for framework the benefit of the members as a whole, directors should take account of a range Companies do not exist in isolation. of stakeholders in making decisions. They need to build and maintain successful Inevitable conflicts will arise between the relationships with a wide range of interests of different sets of stakeholders stakeholders in order to prosper. These but where there is a broad alignment relationships will be successful and between their objectives, a focus on enduring if they are based on respect, how business is conducted and how trust and mutual benefit. stakeholders are treated will create opportunities for value creation that Business’ reputation is still recovering have mutually reinforcing benefits for all. from the impact of the global financial crisis and continuing examples of poor corporate behaviour. As we have seen, cultural failures damage reputation and UK Companies Act 2006, have a substantial impact on shareholder Section 172. value. Intangible assets such as intellectual (1) A director of a company must act in property, customer base and brand now the way he considers, in good faith, account for over 80 per cent of total would be most likely to promote the corporate value, compared to under success of the company for the 20 per cent 40 years ago.1 This shift benefit of its members as a whole, magnifies the impact on total value when and in doing so have regard a reputational crisis occurs. This is a (amongst other matters) to – challenge for boards, which must find ways to understand and influence the factors (a) the likely consequences of any which affect culture and behaviours. decision in the long-term,
The debate about the role of business in (b) the interests of the company’s society is directly linked to the way in which employees, companies create and sustain long-term value for the benefit of a wide range of (c) the need to foster the company’s stakeholders. From the outset of our work business relationships with suppliers, the FRC has been clear that we wish to customers and others, offer constructive observations which (d) the impact of the company’s have practical application. We are not operations on the community and suggesting changes to the current flexible the environment, framework of corporate governance. While legislation, regulation and codes influence (e) the desirability of the company individual and corporate behaviour, they maintaining a reputation for high do not ultimately control it. standards of business conduct, and
(f) the need to act fairly as between members of the company.
1 Ocean Tomo LLC, 2015. Intangible asset market value study. S&P500 http://www.oceantomo. com/2015/03/04/2015-intangible- asset-market-value-study/
8 Financial Reporting Council The UK Corporate Governance Code (the Code) ascribes to boards a Purpose, strategy and The focus on long-term responsibility for setting the company’s the business model performance is critical values and standards (supporting principle and reduces the risks of A.1), while the preface to the Code states: Several chairmen told us that a clear purpose – why the company exists and short‑term, inappropriate what it is there to do – is the starting point behaviour. Poor ‘One of the key roles for the board for a successful company and closely tied short‑term behaviour includes establishing the culture, to culture. In an increasingly complex and performance gets values and ethics of the company. It is business environment, boards and found out in the important that the board sets the correct executive teams need to have a good longer‑term. “tone from the top”. The directors should understanding of the company and how Sir Martin Sorrell, lead by example and ensure that good it makes money – its business model – in Chief Executive standards of behaviour permeate order to have a clear line of sight between WPP throughout all levels of the organisation. the decisions they take and how these This will help prevent misconduct, impact on the company’s culture and unethical practices and support the deliver its purpose. delivery of long-term success.’2 Companies are recognising the value in We need to make sure Culture is closely linked to risk and risk defining and communicating a broader that we are clear-sighted appetite and the Code asks boards to purpose beyond profit which generates enough about our culture, look at the risks which might affect the wealth and delivers benefits to society as and that it is sufficiently company and its long-term viability. a whole. This can help create shared goals, motivate employees and build trust with adaptive to a changing Chairmen and chief executives recognise customers. As organisations become less world and changing the relevance of major shifts in the broader hierarchical, and flexible working more interpretations. environment in which business operates. prevalent, many companies are finding that Sarah Bates Acceptable behaviour evolves over time common purpose is helping to bind Chairman so culture has to be adjusted for the organisations together. context and the times in which the St James’s Place company is operating. For example, Chairmen felt strongly that there is consumers are far more concerned with no ‘one-size-fits-all’ when it comes to the environmental impact of companies culture. What matters is that the culture and of their own behaviour than they were is appropriate for the context in which Culture is most definitely 30 years ago. Well-chosen values typically the company is operating and that there factored into discussions stand the test of time, but need to be is internal alignment between company on the strategy. tested for continuing relevance as society purpose, values, strategy and business changes and business adapts. model(s). Aligning business decisions with Derek Mapp purpose and values and focusing on how Chairman financial targets will be achieved, will over Informa the long-term lead to more sustainable value creation. One example of a framework that can help boards to achieve alignment has been developed by the City Values Forum.3
FTSE chairmen and chief executives 2 FRC, 2016. UK Corporate interviewed strongly agreed that culture is Governance Code https://www. integral to everything they do and features frc.org.uk/Our-Work/Publications/ Corporate-Governance/UK- implicitly or explicitly in discussions about Corporate-Governance-Code- strategy, and in particular how to achieve April-2016.pdf that strategy. 3 City Values Forum and Tomorrow’s Company, 2016. Governing culture: risk and opportunity – a guide to board leadership in purpose values and culture
Culture report: Corporate Culture and the Role of Boards 9 Executive summary
Chairmen also report that culture impacts Investors echoed much of this sentiment, the strategy that is chosen, for example: pointing out that they gain a good deal Culture is a crucial issue of insight into the culture of a company which is inseparable and –– Which international markets should through its articulation of its business inextricable from strategy. the company operate in? model and the attitude to employees. It is critical to execution of –– Can the desired culture be maintained For most large organisations, the business strategy – and is all about in particular markets? model comprises a complex and how we are going to go –– How quickly should the company connected series of relationships, activities, about this. expand? processes and stakeholders, drawing on António Horta-Osório a range of inputs and resources to achieve –– Will rapid growth affect the culture Chief Executive the stated purpose. For boards to have the in a harmful way? Lloyds Banking Group capability to assess whether its culture is For most chairmen, culture is the enabler, aligned with its purpose, a business model the differentiator and a source of competitive framework can be used to support board advantage. The importance of culture to the discussion and to assist in understanding successful operation of the firm is amplified this complexity. One example of such a still further when the capital of the firm is framework has been developed by the vested primarily in the quality of its people. Chartered Institute of Management Accountants (CIMA).4 Chief executives we interviewed told us that culture is an intrinsic part of how At a strategic level, the board’s focus will be the business is managed and an output on setting and monitoring the company’s of how the business is run. Key enablers culture, in terms of the values and for achieving strategic targets include the behaviours which best deliver value creation business model(s), employee behaviour, over the short, medium and long-terms processes and management. Many chief and the incentives which support this. executives agreed that, in normal At an operational level the focus will be on circumstances, what works best for many obtaining assurance that the company’s companies is making sure behavioural operations are aligned with its culture. In this considerations are a prominent, consistent way, boards and executive management part of everything they do. can ensure that decisions around value creation and values are fully integrated.
Our culture is at the heart of the company and is recognised as our differentiator. It is our most cherished asset and one on which the board is heavily focussed to ensure it does not change as the business grows 4 CIMA, 2016. Financial Management and becomes more complex. – Rethinking the business model http://www.cimaglobal.com/ Alastair Lyons, Chairman, Admiral Thought-leadership/Research- topics/Budgeting-and-planning/ Rethinking-the-business-model/
10 Financial Reporting Council It can be difficult for non-executive directors View from the boardroom (NEDs) to obtain sufficient knowledge People on the board must of business operations to challenge Chairmen and chief executives agreed never accept something management effectively. It is important overwhelmingly that boards must have a that they don’t understand. for the chairman to set the tone in the responsibility for culture and must exercise This applies to established boardroom so that NEDs are empowered oversight in this area. The board can members as much as new to raise concerns where they have doubts. influence culture in many ways. The board members. If something is is responsible for appointing and removing The key challenge for boards is to not clear, the board must the chief executive. Cultural change may understand what in practice drives the ask the question even if it take a long time to bed in; and boards can behaviour of employees and management seems a stupid one. They provide continuity. Boards also find it easier and to shape and influence those drivers must have the confidence to be objective since they are not immersed in a way that will foster greater sustainability to admit that they don’t in the day to day running of the business. and improved performance over time. understand.
Strong governance is essential for a healthy The inherent difficulty in understanding and Anthony Habgood culture. As well as the processes and measuring intangibles such as behaviour Chairman practices in the boardroom, governance and culture, means that boards need to RELX Group needs to focus on the substance of start by defining their purpose and values what boards do, who they engage with, and setting out clearly the desired culture what information they are given and what and behaviours, against which they can questions they ask. Boards should see that benchmark actual behaviour throughout good governance runs through all areas the organisation. They then need to of the business, including the executive develop frameworks and tools to assess committee and the layers of middle behaviours and culture to guide management. This will deliver improved management and board decisions. decision-making and better outcomes.
Shareholders rely on the board to oversee a healthy culture that is compatible with the business model, steers the executive and delivers the strategy. Boards must be actively engaged in the business of shaping, overseeing and monitoring culture and holding the executive to account where they find misalignment with company purpose and values.
Culture report: Corporate Culture and the Role of Boards 11 HOW CAN THE BOARD INFLUENCE AND SHAPE CULTURE?
A recurring theme in our discussions was the importance of trust and openness as enablers of positive and productive behaviours.
Culture is much more about people than Throughout our engagement, NEDs were it is about rules. Codes of conduct are comfortable with the board’s responsibility It’s a challenge to influence a baseline; a culture is created by what you for setting the values of an organisation. the culture – it takes a lot do rather than what you say. The alignment However many were much less comfortable of time and effort to and consistency of behaviours of leaders, about their role or ability to embed the change it. and how they communicate through words values in the organisation, and some felt this and actions is the essential starting point.5 is not the role of the non-executives. John Allan Chairman Large organisations, particularly those with Tesco global reach, will have sub-cultures which can reflect different geographies, business units and remits. Nevertheless it is realistic to aspire to a common set of expected behaviours based on company purpose The Board sets the and values. values and culture (how people treat each other, how they operate within the supply chain and how they work with employees) and management is then responsible for It is vital to have a genuinely independent implementing this. chairman who can bring unique perspectives John Watson and expertise to their leadership of the board. Chairman They should be properly remunerated for Bellway this role under governance rules. 5 CIPD, 2016. A duty to care? Richard Solomons, Chief Executive, IHG Evidence of the importance of organisational culture to effective governance and leadership https://www.cipd.co.uk/
12 Financial Reporting Council What counts is the actual behaviour of the organisation and its top people. This is far more significant than a hundred statements about a company’s culture or its ethical policy. David Tyler, Chairman, J Sainsbury
Yet, when we surveyed chairmen on how influential different individuals were on Role modelling and behaviour Leading by example is company culture in practice, 89 per cent of the board about ensuring boardroom felt the role of the chairman is influential behaviour is exemplary or very influential and 54 per cent viewed For boards, culture starts with their 8 and in line with the values, the role of NEDs as influential or very behaviour in the boardroom. Employees ethics and integrity. influential.6 The views of company need to see that the leadership is held 7 to account and to the same standards as secretaries were in line with this. Roberto Quarta the rest of the organisation. ‘Leading by Chairman Even though not directly responsible for example’ was one of the themes most often Smith & Nephew embedding culture, boards nevertheless emphasised by chairmen when speaking and WPP play an important role in influencing about the board’s influence on culture. culture and in supporting the efforts of For example showing respect to senior the executive to embed the values and managers who present to the board.9 reinforce desired behaviours and culture. Several chairmen spoke of managers Two of the most important ways in evaluating the board’s behaviour and many which boards can influence culture are emphasised behaviour as important. When in leading by example – displaying and chairmen were asked how much attention 6 Independent Audit Limited, 2016. communicating the values when in the they give to setting the tone through leading Survey of 44 chairmen of FTSE 100 business – and the selection and by example, 58 per cent said ‘we do and 250 for FRC management of the chief executive. enough for now’ and 36 per cent answered 7 Independent Audit Limited, 2016. ‘some – but we could do more’.10 Survey of 33 company secretaries of FTSE 100 and 250 for FRC 8 Independent Audit Limited, 2016. Cultivating Culture: What boards can and can’t do about behaviour http://independentaudit.com/ publications/cultivating-culture- boards-can-cant-behaviour/ 9 Independent Audit Limited, 2016. Interviews with 58 chairmen of FTSE 100 and 250 for FRC 10 Independent Audit Limited, 2016. Survey of 44 chairmen of FTSE 100 and 250 for FRC
Culture report: Corporate Culture and the Role of Boards 13 How can the board influence and shape culture?
Chairmen, chief executives and company Chief executives secretaries all told us that the most It is very difficult for the powerful way in which the board A view that came through consistently board to drive culture down influences culture, other than through in our engagement was that the chief the organisation. However, its own behaviour, is through its selection executive has the most influence over the they can influence senior and management of the chief executive. culture of the business. This is even more management. The nominations committee should marked in smaller companies.11 support the board by building culture Philip Aiken If accountability for owning, assessing in to recruitment considerations. Chairman and overseeing culture lies with the board, AVEVA In A duty to care?, CIPD supports this view: then accountability for driving culture lies “…for many boards the single greatest primarily with the executive management influence they have on the culture of the team, starting with the chief executive. It is organisation is the appointment, the chief executive that sets expectations remuneration and firing of the CEO – and drives behaviour and change if they get the decision wrong there may throughout the organisation. be severe repercussions felt across the culture of the business.”12 “The tone has to come from the CEO – he is responsible for the delivery Several chairmen expressed the view that globally of a culture that values high appointing the chief executive is one of the standards of conduct. It’s about personal most important tasks of the board, while leadership and being very visible. There removing a chief executive who does not fit is no substitute for speaking to people is one of the most difficult, particularly if 13 face-to-face. Good stories, employee current company performance is good. experiences are also important.” Company secretaries surveyed reported that 73 per cent of boards consider the Stuart Gulliver, Chief Executive, HSBC cultural and behavioural fit of an individual during recruitment. “There is board culture and organisational culture. The two are linked but it is the Chief executives we interviewed agreed CEO who most influences organisational unanimously that driving culture was a culture. The key is to balance the focus key part of their role and the board should of the board so as to encourage the hold them to account for doing that. right behaviours across the organisation They believe that NEDs have an important without trying to do the job of the CEO.” role in helping executives anticipate Ian Durant, Chairman, Greggs unintended consequences, including behavioural ones, of management proposals.
Driving culture is a key part of my job. ‘Driving’ is the right word, the world is changing 11 Roundtable with executives and too fast just to speak about maintaining. I expect non-executive members of the Quoted Companies Alliance – the board to hold my feet to the fire over it. April 2016 12 CIPD, 2016. A duty to care? Rob Noel, Chief Executive, Land Securities Evidence of the importance of organisational culture to effective governance and leadership 13 Independent Audit Limited, 2016. Survey of 44 chairmen of FTSE 100 and 250 for FRC
14 Financial Reporting Council Chief executives need to be visible and Planning the succession of the chief communicate constantly with the executive well in advance, and having As CEO, everything you say organisation through meetings, events, an open discussion about the values and is amplified manifold and messages, webcasts and video. Several attitudes required in a new chief executive the ‘say/do’ ratio is what chief executives emphasised the is important. Most chairmen stated that really matters. importance of being approachable and cultural fit was a major factor in senior accessible to customers and employees. executive selection. Internal promotion is Javed Ahmed Making it easy to communicate directly perceived as considerably less risky, given Chief Executive also provides good insight. the individual is much better known, and Tate & Lyle will have demonstrated adherence to the Communications from the chief executive company’s values. can have a significant effect on behaviour. Consistent, regular and open communication of simple messages are “If the culture is working and the company is a financial success, there is It is essential to avoid key to building trust and encouraging the dilution of the message, to desired behaviours. A number of chief much less risk in selecting an internal candidate. If something is wrong and maintain simplicity and use executives found sharing stories of good simple language. and bad culture (from the business) was you want to make big changes, it is effective in demonstrating expected better to get an external candidate who António Horta-Osório behaviour. will bring in new values as CEO.” Chief Executive Gareth Davis, Chairman, Wolseley Lloyds Banking Group If the board is seeking a change in culture, it must clearly understand and articulate The board has a role in assessing the the values and behaviours it wishes to performance of executives. The chairman/ promote in order to guide its choice of chief executive relationship is seen as vital chief executive. Several chairmen stressed by both chairmen and chief executives – the importance of including values and it should be collaborative, constructive War stories are a useful way expected behaviour in a new chief and open. Basing this relationship on trust to get the culture solidified. executive’s job profile, alongside skills, rather than competition allows the chairman Jeremy Darroch experience and track-record. to act as their sounding-board.14 Chief Executive Sky
The board can do nothing without the CEO who has to lead. The board has to influence through him which is why CEO selection is the most important thing a board has to do. Ian Durant, Chairman, Greggs
14 Independent Audit Limited, 2016. Survey of 33 company secretaries of FTSE 100 and 250 for FRC
Culture report: Corporate Culture and the Role of Boards 15 How can the board influence and shape culture?
“The relationship between the chairman and CEO is important in defining cultural Culture on the agenda The chairman is a very behaviour and policies across the Boards, on the whole, are spending more important ambassadorial business. The more closely they work time discussing values, behaviours and figure. He travels and together, the more likely it is that a culture than they were five years ago.15 represents. There needs strong ethical culture will evolve across Some boards are addressing the topic as to be a close chairman/ the business.” a standalone agenda item, while others CEO relationship. Alan Thomson, Chairman, Bodycote report actively discussing and addressing values, behaviour and culture in a more George Weston One of the most important tasks for boards integrated way, for example as part of Chief Executive is to hold the chief executive and senior discussions on customer and employee Associated British Foods executives to account. Where boards feedback, remuneration and reward become aware that the chief executive policies or health and safety incident (or another member of the executive reports. Most boards agreed that they committee) is not demonstrating the could be seeking more assurance on The Board needs to show desired behaviours, they should take action. culture. There was also considerable it has zero risk appetite for agreement that audit, nominations, If the individual is not receptive to the poor ethical behaviour. remuneration and risk committees could board’s efforts, it may mean the board must This sends a clear signal. do more to support the board in exercise its power to dismiss them. While Turning a blind eye to addressing culture. this can be unsettling for investors and dubious behaviour is employees, several chairmen spoke of very dangerous. having to change the chief executive to gain “The chairman’s responsibility for culture control of the culture and the positive impact has moved to the top of my agenda as Sir Peter Gershon bringing in a new chief executive can have. a result of my responsibilities under the Chairman Senior Managers’ Regime. Now I receive National Grid a lot of information on culture, a year “Dominant personalities can be disruptive ago none.” in all sorts of ways especially culture. Choosing the correct balance of people Mark Nicholls, Chairman, is key to culture.” Rathbone Brothers John Watson, Chairman, Bellway
15 Financial Times & Institute of Chartered Secretaries and Administrators, 2016. Boardroom Bellwether – Insights into what boards are thinking from the survey of FTSE 350 company secretaries https://www.icsa.org. uk/knowledge/research/ft-icsa- boardroom-bellwether-survey- summer-2016
16 Financial Reporting Council Our business model Culture is not a separate item but requires us to focus on the there are elements of it in all other discussions, needs of customers and employees. The board decisions and actions – customer service, conversation is not framed measuring and managing people, or informed by an aggregated set of cultural or how we are dealing with suppliers and values-based indicators and agents – and they all come together. there are few formal reports, but the board spends Philip Rogerson, Chairman, Bunzl a great deal of time looking at culture and values, driven by specific issues or by regular feedback, surveys and information from the frontline. The figure below illustrates how often some The challenge for boards is how to FTSE companies discuss culture as a full coordinate across the organisation and Patrick Lewis board agenda item: build a holistic approach to addressing Group Finance Director 17 culture. One large UK bank has recently John Lewis tasked a number of its business divisions How frequently is ethics and to work together to provide a single report culture a full board agenda item? of cultural indicators to the board. The (Number/percentage of respondents)16 individual functions each track many different data points in relation to behaviour 6% and culture across the bank. Discussion 17% at the board is focussed on a small number 1 of the most meaningful measures that 3 provide crucial insight and can be tracked over time. The chairman is confident this 11% is a significant step in helping the board 2 6 33% perform its role in seeking assurance on culture. 1 6% Those boards reporting that values, behaviours and culture were rarely 5 discussed, explained that company culture is intrinsic and expected behaviours are 28% understood by all and do not need to be articulated. This may be a result of a long established culture, a sense of Once a quarter complacency or a reluctance to address Every six months the subject because it is perceived as difficult to pin down. Once a year Less than once a year Never 16 Institute of Business Ethics, 2016. Other Culture by committee – the pros and cons Base: Of the 24 survey participants, 17 Roundtable with heads of internal 18 responded to this question audit, human resources, finance, and risk and compliance – January 2016
Culture report: Corporate Culture and the Role of Boards 17 How can the board influence and shape culture?
Like risk, culture doesn’t benefit from being given its own separate status and processes. It is part of doing good business and needs to be intrinsic in everything. Sir Peter Gershon, Chairman, National Grid
The head of investor relations of a private Cultural due diligence in equity firm who had experienced a merger mergers and acquisitions with a European business reflected on his experience. Participants highlighted how important it is to consider cultural fit and alignment of values during a prospective merger “Both companies were in the same or acquisition. Many chairmen and chief business and had a similar history. executives said they had not pursued a On paper they were the perfect match merger because of a lack of cultural fit or for each other but no one asked about because they had concerns about the cultural fit and in the end it did not work. values and behaviours in the other We were still talking about ‘us and them’ company. Private equity houses also said two years later, we haven’t had the it was common for them to walk away from results we expected when the two a deal because of an overly dominant businesses came together and now managing director or chief executive that we’re looking at a reverse takeover.” they did not feel they could work with.18 Chief executives we interviewed reported In contrast, our survey of company it was important to address culture in a secretaries revealed that while 40 per cent merger or acquisition proactively without felt the board had sufficiently discussed seeking to impose it. Consistent and cultural due diligence ahead of a merger or clear messages on values and behaviours joint venture, almost 30 per cent disagreed. can help generate understanding and When doing M&A, there are two major concerns: commitment to the culture of the acquiring company. financial control and culture. On the culture side, it is either rushed through too quickly or the target never culturally integrates. It is important to take time to understand how to embed and cross- 18 Roundtable discussion with fertilise culture – not super-impose it. members of the British Venture Capital Association – May 2016 Jeremy Darroch, Chief Executive, Sky
18 Financial Reporting Council Questions for boards
Values and behaviours Has the company made a public commitment to the values? How are we demonstrating the board’s behaviour reflects the behaviour we What behaviours are being driven when expect throughout the company? setting strategy and financial targets? Are we leading by example? What percentage of board time is spent Are we clear about the values and on financial performance management behaviours we expect when recruiting against targets? And on behavioural new executives? performance management? Is the balance right? Do we hold the chief executive to account where we see misalignment? Is company tax policy consistent with stated values? Are we discussing culture in sufficient depth at board meetings? How are we challenging 'group think' and testing key decisions for The head of investor relations of a private How are we taking account of culture cultural alignment? equity firm who had experienced a merger in our board effectiveness reviews? with a European business reflected on Are we seeing evidence of sub-cultures his experience. How can we ensure we consider the or pockets of autonomy in the business impact on culture in all the decisions that could undermine the overall culture? “Both companies were in the same we take? business and had a similar history. Mergers and acquisitions On paper they were the perfect match Do the committees support the board for each other but no one asked about on culture? How confident are we that we can cultural fit and in the end it did not work. achieve a cultural fit within a reasonable We were still talking about ‘us and them’ Is there a need for a specific conduct, timeframe and what could be the cost to two years later, we haven’t had the ethics or culture committee? the business of a cultural misalignment? results we expected when the two businesses came together and now What is the company telling the outside What is our strategy for addressing we’re looking at a reverse takeover.” world about what it stands for and how it culture if we proceed? conducts business? Chief executives we interviewed reported it was important to address culture in a merger or acquisition proactively without seeking to impose it. Consistent and clear messages on values and behaviours can help generate understanding and When doing M&A, there are two major concerns: commitment to the culture of the acquiring company. financial control and culture. On the culture side, it is either rushed through too quickly or the target never culturally integrates. It is important to take time to understand how to embed and cross- fertilise culture – not super-impose it. Jeremy Darroch, Chief Executive, Sky
Culture report: Corporate Culture and the Role of Boards 19 BRINGING THE VALUES TO LIFE
If values are to be more than just words on a poster they need to be translated into a set of expected behaviours that are meaningful to the company and those who work there.
Built to Last – successful habits of visionary Blueprint for Better Business encourages companies highlighted that strategies companies to first establish their purpose. Most companies find it and practices change, but values do not.19 Companies including Unilever, Old Mutual difficult to define culture While a few of the companies we spoke and Vodafone actively support this in a way that makes it with had recently updated their values, approach to ‘uniting corporate purpose actionable. It is important most have had the same set of values and personal values to serve society’ to make it concrete in terms for many decades. Integrity, respect and which starts with having a purpose of the behaviours that are innovation are the three most commonly which delivers long-term value.21 expected and then consider expressed values of the FTSE 100. how every element of the organisation sends The values most valued by FTSE 100 companies20 messages about what the behaviour norms should be.